Is Gold A Good Investment?

Investing in gold is a very effective preserver of wealth. Many investors chose to diversify their investment and invest about 10% of their portfolio in gold to protect them from economic turmoil. Depending on how bullish or bearish you are on gold, you may chose a higher or lower allocation.

There is an ongoing argument on true value of gold. Analysts split in this topic and argue their case. Below are two articles that look at gold from two different points of view. You may contact us to include your point of view.

Bullish Gold

UPDATE: Jan 3, 2011

We use global macroeconomics to evaluate the gold market and the direction it is heading. In 2010, the fundamentals of the gold market and currencies made us believe gold is in a run toward $1,500 by the end of the year. It finished at $1,421, an impressive 30% gain for the year. Stocks that we follow performed even better.

In the large picture we see gold trending up this year due to the current macroeconomics and our expectations of the market response. Some may call it a bubble, but even so, it has a lot of room to expand before bursting. The yellow metal could easily reach $1,750 an ounce in 2011. Take that as a target price for now as we will be evaluating the situation regularly and forecast an up or a downtrend in prices for shorter time frames. Check out the gold price forecast page for the regular updates including technical analysis.

Currency wars, in our opinion, will be the major force in deciding the direction and trend of gold prices. Countries around the world will try to prevent the appreciation of their currency, or at least keep the pace below the trend of Chinese yuan.

In the first quarter of 2011, expect a higher dollar against euro due to the European continued fiscal crisis. The Fed will likely keep boosting the asset market and US central bank will keep interest rates near zero. While the low interest rate is bullish for gold, rise of dollar slows down the uptrend movement of the dollar-denominated gold. The fiscal deficits, however, could send dollar to another round of weakness. Check out the dollar page for currency news and analysis.

Bearish Gold

Summary of a blogpost published at the Wall Street Journal on why gold is not a good investment:

Everyone is touting gold as a hedge against economy, markets, family troubles, etc., but I think buying gold right now would be a horrible mistake.

Gold has industrial uses in addition to being used to make money or jewelry. It’s a good conductor of electricity and is also used in dentistry. But silver has the same uses and many more. What’s the big difference between silver and gold? Gold is $1,200 an ounce and silver is $18. If you can choose between the two for your industrial use, you’d always choose silver. That’s why the world gold supply keeps going up. Almost every ounce mined remains in supply forever, as opposed to silver, which gets mined and then consumed.

So why does anyone buy itl? Because it is ”fear metal” - you buy it when you are afraid of every other investment. When interest rates go to 0%, as they have now, then U.S. T-bills don’t represent a good alternative to gold. So if you are afraid of stocks, you buy gold instead of T-bills. If global political stability is in question, as it was in 1980 with the Iran hostage crisis and the Soviets invading Afganistan, you buy gold. If global bank stability is in question, you buy gold since you can store it separate from the banking system (albeit with a cost).

Some people say gold is an inflation hedge. But so are stocks. If the dollar weakens, then our products abroad will be cheaper and profits will shoot straight up. Over 40% of the S&P 500’s revenues come from abroad. That makes stocks a good long-term hedge against inflation. Also, many stocks have dividends. The ”dividend aristocrats” - that is, companies that have increased their dividends for 25 straight years or more, have yields that alone surpass the long-term returns of gold. That’s not even counting capital gains you get when the stocks go up. The dividend aristocrats include Procter & Gamble (PG), McDonalds (MCD), and Walmart (WMT).